ExamFX Ch. 2

Endorsements

Printed addendums to a contact that are used to change the policy's original terms, conditions, or coverages. Endorsements may be included at the time the policy is issued or added during the policy term. Endorsements must be in writing, attached to the policy and signed by an executive officer of the insurer to have any effect on the contract. Endorsement may be used to add or delete coverage, or may be used to correct items such as the insured's name, address, etc.

Insurance Consultation Services Exemption Act

Protects an insurer that performs these services, or fails to perform the services, from liability for damages from injury, death, or loss resulting from services.

Additional (or supplementary coverage)

Provision in an insurance policy that provides an additional amount of coverage for specific loss expense, at no additional premium.

Vicarious Liability

Purpose is to transfer the liability from one person to another person who would probably have a greater ability to pay. In some jurisdictions, parents may be held vicariously liable for negligent acts of the children and employers liable for the acts of their employees.

Proximate Cause

An act or event considered a natural and reasonably foreseeable cause of the damage or event that occurs and damages the property or injures a plaintiff. The negligence must have been the proximate cause of the damage if the injured party is to collect for the damage. This means that there must have been an unbroken chain of events beginning with the negligence and leading to injury or damage. (the negligence must have been the cause without which the accident would not have happened, also referred to as direct liability)

Defenses Against Negligence

An individuals negligent behavior does not necessarily mean that a person will be held legally liable. There are certain defenses that may be interposed by the negligent party in order to defeat a claim.

Statute of Limitations

By law, some states have set a time limit in which an injured party may bring legal action against another party for certain types of injuries

Assumption of Risk

This defense of an action for recovery for injuries attests that if a person recognizes and understands that there is a danger involved in an activity and voluntarily chooses to encounter it, the assumption of risk may bar recovery for injury caused by negligence. Ex. going to baseball game and hit by foul ball

Claim Settlement Options

at the time of loss, the insurers loss payment options include paying at least of the following: -the value of the lost or damaged property -the cost of repairing or replacing the lost or damaged property -the cost of taking all or part of the property at an agreed or appraised value -the cost of repairing, rebuilding or replacing the property with other property of that kind or quality.

Named Insured

the individual whose name appears on the policy declaration

Merit Rating

Most commonly used in personal auto insurance. In this method of rating, the insured's premium is based not on the actual loss record , but on other factors that indicate the probability that loss will occur. An example would be a bad driving record that does not include any at-fault accidents.

Loss Payment

(Insurance Carried / Insurance Required) x Loss Amount = Loss Payment

3 Elements of Insurable Risk

1. Financial (a monetary interest) 2. Blood ( a relative) 3. Business ( a business partner)

5 Individual Rate-Making Approaches

1. Judgement Rating 2. Schedule Rating 3. Experience Rating 4. Retrospective Rating 5. Merit Rating

4 Primary Elements for in establishing negligence

1. Legal duty 2. Standard of care 3. Unbroken chain of events 4. Actual loss or damage

Two classes of compensatory damage

1. Special damages 2. General Damages

Deductables

A dollar amount an insured must pay on a claim before the insurance policy provides coverage. A higher deductible amount usually lowers the amount of the premium

Punitive Damage

A form of punishment for extreme outrageous behavior, gross negligence, or willful intent

Contribution by equal shares

A loss is paid under contribution by equal shares when 2 or more insurance company policies cover at the same level (primary or excess). Each insurer contributes an equal amount to the loss settlement until the loss is paid, or until each insurer has exhausted its limits of insurance, whichever comes first.

Liberalization

A property insurance clause that extends broader legislated or regulated coverage to current policies, as long as it does not result in a higher premium. Ex. If the insurer introduces a new coverage that is free and improves coverage, the insured gets the benefit of the new coverage immediately (liberalization clause) and won't have to wait for their policy renewal.

Pro rata

A provision found in some property insurance policies that provides for the sharing of loss with other insurance that may be written on the same risk in the same proportion as their limits of insurance bear to the total coverage of all policies covering the risk, whether collectible or not.

Other Insurance

A provision in an insurance policy will respond if there is other valid insurance written on the same risk.

Loss Costs

A rating method developed by ISO that provides an insurer with that portion of a rate that does not include provisions of expenses (other than adjusting expenses) or profit and are based on historical aggregate loss and loss adjustment expenses projected through development to their ultimate value and through trending to a future point in time. The expense and profit components to develop the final rate must be added by the insurance company

Retrospective Rating

A self-rating plan under which the actual losses during the policy period determine the final premium, subject to a minimum and maximum premium. (A deposit premium is required at the inception of the policy. That premium is then adjusted at the end of the policy term based on the actual loss experience)

Combined Single

A single dollar limit of liability applying to the total of damages for bodily injury and property damage combined, resulting from one accident or occurrence. The limit may be used in any combination of amounts, not to exceed the single limit.

Peril

A specific cause of loss. Perils insured against in standard property policies include fire, wind, hail, and explosions

Pre-Occurance (accident)

A sublimit in a liability policy that put a ceiling on the payment for all claims that arise from a single accident/occurance

Accident

A sudden, unplanned and unexpected event, not under the control of the insured, resulting in injury or damage that is neither expected nor intended.

Named Peril

A term used in property insurance to describe the breadth of coverage provided under an insurance policy form that insures against any risk of loss that is not specifically excluded (this term replaced the use of the term "all risks")

Tort

A wrongful act or violation of someone's rights that leads to legal liability. Torts are classified as intentional or unintentional (referred to as negligence).

Pennsylvania Property and Casualty Guaranty Association

An organization of insurers licensed to write property and casualty insurance on a direct basis in the Commonwealth of Pennsylvania. The association assumes the insurance policy obligations of licensed insurers in Pennsylvania who become insolvent.

Private Residential

An owner occupied dwelling is a residential structure with four or less household units, one which is occupied by the owner. Once an insurance policy covering an owner occupied building has been in affect for 60 days, it is considered an unfair insurance practice to to cancel or to refuse to renew the policy unless: -

Intentional Tort

Any deliberate act that causes harm to another person regardless of whether the offending party intended to injure the aggrieved party. For purpose of this definition, breach of contract is not considered an intentional tort.

Insurance Consultation Service

Any service performed by an insurer relating to an insurance application, a new insurance policy, or an existing insurance policy for the purpose of reducing the chance of injury, death, or loss.

An insured

Anyone who is covered under the policy, whether named or not. An example of an insured would include an unnamed spouse or any resident relative that is a member of the named insured's household.

Intervening Cost

Bars or reduces recovery to an injured person if an intervening cause interrupted the chain of events and sets in motion a new chain of events. For example, a person clears their sidewalk of snow and ice following a storm, but in a short while, it begins to snow again. Before the person has an opportunity to clean the walk again, a person walks by, slips, and is injured.

Occurrence

Broader definition of loss, includes those losses caused by continuous or repeated exposure to conditions resulting in injury to persons or damage to property that is neither intended nor expected

Definitions

Clarifies terms used in the policy. Typically, words that are printed in bold, italics, or quotations have a definition as to the meaning of their contract.

Strict Liability

Commonly applied in product liability cases. A person or business that manufactures or sells a product makes an applied warranty that the product is safe. The business is then liable for defective products, regardless of fault or negligence. If the product causes injury and the claimant can prove the defect, the defendant will be held strictly liable for the damage

Policy Territory

Defines the location where coverage will be provided

Exclusions

Details the perils that are not insured against and what persons are not insured. Exclusions restrict some of the broad terms used in the insuring agreement. This section can exclude people (except a spouse), property, and perils

Exclusion examples from coverage in a property policy

Earth movement and water damage -earth movement is excluded if caused by earthquake, mudflow, or volcanic eruption -Under the water damage exclusion, the following perils are not covered: flood and water subsurface water, water that backs up through sewers or drains or overflows through a sump pump, or water below ground that seeps through basement walls.

No benefit to the bailee

Excludes any assignment or granting of any policy provision to any person or organization holding, storing, repairing, or moving insured property for a fee. A business that has temporary possession of property of another and will do something with that property for the mutual benefit of both parties is a bailee.

Components

Factors that determine rates including loss reserves, loss adjusting expenses, operating expenses, and profits.

Negligence

Failure to behave in a manner that is reasonable or prudent.

Absolute Liability

Imposed on defendants engaged in hazardous activities, such as harboring wild animals, using explosives, etc. The injured party does not need to prove negligence.

Duty to Defend

In addition to the promise to pay all sums that the insurer becomes legally obligated to pay, liability coverage includes a promise to defend the insured in any lawsuit involving the type of liability insured under the coverage. Once the limit of the liability has been paid, the insurer has no further obligation to defend an insured.

Duties after loss

In the event of a loss covered by the policy, the named insured is required to: -Protect the damaged property from further damage -Prepare an inventory of damaged property -Cooperate with the insurer in settling the loss -Notify the police in case of a theft loss -Submit to the insurer a signed sworn proof of loss with an allotted amount of time after being requested to do so.

Additional Insureds

Individuals or businesses that are not named as insureds on the declaration page, but are protected by the policy, usually in regard to a specific interest. Additional insureds usually are added to the policy by endorsement.

Fire Insurance

Insurance against direct loss of property by fire, lightning, or removal of the premises endangered by the perils insured against. This policy must specify the amounts of coverage, rates and premiums under the standard form and additional coverages or perils insured under endorsements.

Legal Duty

It must be shown that the defendant had a legal duty to act or not act

Standard Mortgage Clause

Known as loss payable clause, is a basis provision of all property policies for real property. Non-movable property such as houses and other structures is classified as real property, while moveable property such as autos, mobile homes, furniture and equipment is classified as personal property for insurance purposes. In the event of a loss to real property, payment will be made to the insured and the mortgagee as their insurable interest appears. In other words, the mortgagee's right to recover is limited to the amount of the remaining debt, and at no time will the mortgagee receive more than the insurable interest in the property. If an insurance policy is to be cancelled, a mortgagee must receive prior written notice of such cancellation.

Indirect Losses (Consequential Losses)

Losses considered a result of direct loss. Such losses usually result from the time it takes to repair or replace damaged property. The most prevalent type of direct loss for individual homeowners is the extra living expense that may be incurred by the insured while the home is being repaired. For commercial risks, the primary type of indirect or consequential loss is the loss of profits a business may suffer because of having to close down until the business is repaired.

Bodily Injury

May lead to claims by the injured party not only for medical expenses and lost wages, but also for disfigurement, pain and suffering, mental anguish...

Property Damage

Measured by the actual monetary loss the injured party suffered, which is measured by the value of property damaged or destroyed and the loss of use of that asset

Vacancy

Refers to an insured structure in which no people have been living or working , and no property has been stored for the period of time, as stated in the policy (usually 60 days)

Unoccupancy

Refers to an insured structure in which no people have been living or working within the required period of time, but some property is restored. Ex, If the insured moved the property would be considered vacant. If the insured went on vacation for two weeks, the house would be considered unoccupied.

Noncurrency

Refers to other insurance written on the same risk, but not on the same coverage basis.

Function of underwriter

Refers to the operations of an insurance company where an employee called the underwriter is responsible for evaluating applications submitted to the insurer and determining whether a policy should be issued, and if so, the terms, conditions and rates for that policy

Class Rating (or manual rating)

Refers to the practice of computing a price per unit of insurance that applies to all applicants possessing a given set of characteristics (a class rate might apply to all types of dwellings of a given kind of construction in a specific city, or all drivers of a given gender and and age driving in the same geographic area) Advantage: Permits the insurer to apply a single rate to a large number of insureds, simplifying the process of determining their premiums. In establishing the classes to which class rates apply, the rate maker must compromise between a large class, which will include a greater number of exposures and thereby increase the credibility of predictions

Insuring Agreement

Section of an insurance policy that establishes the obligation of the insurance company to provide the insurance coverages as stated in the policy. The agreement lists parties to the contract, effective, and renewal dates, the description of the coverage provided, and perils. Usually found after policy declarations.

Split

Separately stated limits of liability for different coverages. The limits may be stated on a per person, per occurrence, or per policy period basis, or can be split between bodily injury and property damage. Many auto liability policies are written with split limits Ex, 25/50/25 would indicate that the policy would pay up to $25,000 for the injury of a single person; up to $50,000 for bodily injury to two or more people (but not more than $25,000 to any one person); and up to $25,000 for damage to property of others

Special Damages

Specific out-of-pocket expenses for medical, miscellaneous expenses, and loss of wages. General damages compensate the injured person for pain and suffering, mental anguish, disfigurement, and other types of losses

Coinsurance

States that in consideration of a reduced rate, the insured agrees to maintain a certain minimum amount of insurance on the insured property. This encourages the insured to insure the property closer to its full value. In case of a partial loss, the insurer will pay the partial loss in full if the insured has maintained the required percentage of insurance with relation to the value of the property. If the amount of insurance maintained is less than the coinsurance clause requirement, the insurer will only pay the percent of the loss that the insurance bears in relation to the amount of insurance that should have been carried. In the event of total loss, the coinsurance clause does not operate, and the face amount of the policy is paid.

Insurance Rate

The amount charged for a particular amount of coverage. It is the actuarially concluded unit of cost that is applied against the rating basis from which a policy premium is developed, or the charge per unit of exposure. Ex. the policy owner wants to insure a 1,000 square foot building. The insurer has established a rate of $1.00 per square foot. The required premium will then be $1,000 ($1.00 x 1,000 sq. ft.). Rates may be developed by property values (property or fire insurance), revenues receipts (casual or liability), or payroll (workers compensation insurance)

Loss Payable Clause

The clause used to cover the interest of a secured lender in personal property. If the insurer decides to cancel or not renew a policy, the loss payee must be notified in writing.

Standard of Care

The defendant must have used a standard of care that breached that legal duty. Standard of care implies acting as a reasonable person would act.

Negligence

The failure to use the care that a reasonable, prudent person would have taken under the same or similar circumstances.

Comparative Negligence

The fault is shared between the parties involved, and the awards for damages are reduced by the percentage of negligence of each party.

First named insured

The individual whose name appears on the policy's declaration. In commercial insurance policies, the first named insured has control of the policy and is the only insured who may cancel the policy or request changes to the policy, and is also the one responsible for paying premiums and reporting losses

Contributory Negligence

The injured party must be completely free of fault in order to collect. Any negligence on the part of the injured party that contributed to the injury, however slight, normally will defeat the claim. A variation of contributory negligence is known as "the last clear chance rule". It may be used as a defense by a negligent party who can show the injured party had the last clear chance to avoid the loss, but did not

Insurable Interest

The insured must have insurable interest in the person or property covered by an insurance policy. In property insurance, this means the insured would incur a financial loss if the insured property was damaged. As a result, an insurable interest may be created by the ownership, custody or control of a property. In property and casualty insurance, insurable interest must exist at the time of the loss.

Experience Rating

The insured's own past loss experience enters into the determination of the final premium. Experience rating is superimposed on a class-rating system and adjusts the insured's premium either up or down, depending on the extent to which his experience has deviated from the average experience of the class.

Subrogation

The insurer's legal right to seek damages from third parties, after it has reimbursed the insured for the loss. Subrogation is based on the principle of indemnity by preventing the insured from collecting on the loss twice: Once from the insurer and a second time from the party that caused the damage.

Limits of Liability

The insurers liability for payment as stated in an insurance policy. Limits of liability is the maximum amount of money the insurance company will pay for a particular loss, or for loss during a period of time.

Per Person

The maximum amount available for payment of bodily injury to a single person in an accident, regardless of the policy limit stated in the policy for bodily injury claims

Policy limits (also known as limitations)

The maximum amount the insured may collect, or for which and insured is protected under the terms of the policy

Aggregate Limit

The maximum limit of coverage available under a liability policy during a policy year, regardless of the number of claims made or the number of accidents that occur. Losses paid under coverages subject to aggregate limits reduce the amount available for future losses. Aggregate limits are restored at the anniversary of the policy.

Actual Loss or Damage

The mere fact that carelessness existed is not sufficient enough cause for legal liability. Actual injury or damage must have been suffered by the party seeking recovery.

Excess Policy

The policy that only pays loss after the primary policy or amount has paid its limit

Primary Policy

The policy that pays first in the event of a covered loss- or in a layered program of insurance, the policy that covers the first layer of loss.

Underwriting

The process of reviewing applications for insurance and the information on the application. In other words, it is a risk process selection

Schedule Rating

The rates are developed by applying a schedule of charges and credits to some base rate to determine the appropriate rate for individual exposure. Schedule rating is used less frequently today because of the introduction of ISO's class rating-program for many types of commercial building that had been previously schedule rated, leaving only the vary largest and most complex risks to be schedule rated

Abandonment

The relinquishing of insured property into the hands of another, or in the possession of no one in particular. Most property insurance policies prohibit an insured from abandoning insured property following a loss, and require that the insured protect the property from further loss.

Unintentional Tort

The result of acting without proper care. This is generally referred to as negligence.

Conditions

The section of an insurance policy that indicates the general rules or procedures that the insurer and the insured agree to follow under the terms of the policy. Examples of Conditions: -Inspections -Changes to the policy -liberalization clause -return of premium

Declarations

The selection of an insurance policy containing the basic underwriting information, such as the insured's name, address, amount of coverage and premiums, and a description of the insured's locations. It also contains any supplemental representations by the insured. (usually first page of policy)

Cancellation

The termination of an in-force insurance policy, by either the insured or the insurer, prior to the expiration date shown in the policy. Termination may be voluntary, involuntary, or in mutual accordance with provisions contained in the policy

Nonrenewal

The termination of an insurance policy at its expiration date by not offering a continuation of the existing policy or a replacement policy

Policy Period

The time period, stated on the declarations page, during which the policy provides coverage

Assignment

The transfer of a legal right or interest in an insurance policy. In property and casualty insurance, assignments of policies are valid only with prior written consent of the insurer

Direct Loss

The two types of property losses that an individual or business are exposed to are direct and indirect. Property insurance only covers direct losses. However, indirect losses are related to direct loss, and insurance coverage to protect against these indirect losses often is added to property insurance policies. Direct losses mean direct, physical damage to buildings and/or personal property. Direct loss also includes other damage where the insured peril was the proximate cause of loss. Ex, An insured building catches fire. When the department applies water to put the fire out, the wall and floor coverings suffer water damage. Although water damage is not an insured peril, the damage is paid under the peril of fire because fire was the proximate cause.

Insurer provisions

Used in the event of loss to repair or replace damaged property with property of like kind and quality or to adjust the loss and make payment to the insured or a person legally entitled to receive payment within 60 days of receiving the insured's proof of loss.

Judgement Rating

Used when credible statistics are lacking or when the exposure units are so varied that is impossible to construct a class. This technique is used in Ocean Marine insurance, although it is also used in other lines where permitted by state's rate laws. (A risk that has been judgement rated may also be referred to as "A" rated)

Valued Policy

Used when it is difficult to establish the value of insured property after a loss occurs, or when it is desirable to agree on a specific value in advance. A valued policy provides for payment of the full policy amount in the event of a total loss or without regard to actual value or depreciation.

Certificate of Insurance

Written evidence showing that an insurance policy or policies have been issued. The certificate indicates both the amounts and types of insurance provided, but does not obligate the insurer to the person whom the certificate was issued.

Binder

a temporary contract of insurance issued by an insurer or its agent that places insurance in effect prior to the policy being issued. (In PA binders may be made for a period not to exceed 30 days.)

third-party provisions

address the rights of a third party that may have a secured financial interest in the insured property.

Pure Comparative negligence

allows the plaintiff (the party who brings lawsuit) to recover damages, as long as he/she is not 100% negligent. In contrast, modified comparative negligence, also known as "equal to or greater than" rule, the injured party may only recover damages if his or her fault is less than that of the defendant (the party being sued)

Basic Property insurance

an insurer must continue basic property insurance for 180 days after the death of the insured or until the sale of the covered property, whichever occurs first, and as long as the premiums are paid.